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Second Quarter 2017 / Market Report

New Jersey

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As of May 2017, New Jersey’s unemployment rate fell to 4.1 percent, compared to 5.1 percent at the same time last year. This rate is at its lowest level since June 2001, below the national unemployment rate of 4.4 percent.

While the private sector contracted during May by 14,000 jobs, there has been steady job growth over the past 12 months, with private employers adding 48,100 jobs since May 2016. All nine major private industry sectors posted job gains over the past 12 months. On the other hand, the public sector has decreased by 5,000 jobs since May 2016.

On the political front, Republican Kim Guadagno and Democrat Phil Murphy won their primaries and will face off in this November’s gubernatorial election. Among the challenges that the next Governor will face, is trying to grow the New Jersey economy. This could prove to be difficult as the state is saddled with over $153.5 billion of debt, which is now the third largest in the country.

The New Jersey office leasing market saw a drop in activity during the second quarter of 2017, with 1.8 million square feet of completed leases, compared to 3.4 million square feet during the same period last year. In the Northern New Jersey market, leasing activity dropped to 700,000 square feet, from 2.4 million square feet year-over-year. The Central New Jersey market remained relatively flat with activity of 1.0 million square feet.

One of the largest lease transactions of the quarter took place at Somerset Development’s Bell Works building in Holmdel, with The Guardian Life Insurance Company signing a 15-year, 90,000 sf lease. Other recent notable signees at Bell Works include iCIMS, WorkWave and JCP & L. The former Bell Laboratories site has become the “belle” of the office market ball, as tenants and guests alike can literally work, eat and play at the iconic site. The Crawfords Corner Road building is expected to be the new home of the Holmdel Public Library, as well as offer shops, cafes, restaurants, health-care services, hotel and a conference center.

Economy OfficeLeasing

Second Quarter 2017 / Office

New Jersey

1.7M12-month absorption (SF)

15.9%

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Second Quarter 2017 / OfficeNew Jersey

Vacancy and RentsWhile there was negative net absorption during the second quarter of 2017, the 12-month net absorption was around 1.7 million square feet. This positive absorption has helped the overall vacancy rate to drop 30 basis points year-over-year, down to 15.9 percent. Average direct asking rents rose to $27.33 this quarter from $26.99 year-over-year.

Investment SalesAccording to Real Capital Analytics, $331.9 million worth of office sale transactions were completed during the second quarter of 2017. This represented a drop from the $797.2 million in sale transactions year-over-year.

One of the largest sales during the second quarter of 2017 was Marcus Partners’ sale of 500 Plaza Drive in Secaucus to Singapore-based Manulife US REIT. The 445,060 SF building sold for approximately $115 million at $258 per square foot. The eleven-story office building recently underwent a $16 million renovation and is currently 98.9 percent occupied. The building serves as the headquarters to both The Children’s Place and Quest Laboratories, who relocated to 500 Plaza Drive last year from Madison, New Jersey.

Market Spotlight - Morristown Central Business DistrictMorristown has seen significant reinvestment and redevelopment since 2008 and has positioned itself as one of the top central business districts (“CBD”) in the state to “live, work and play.” The combination of transportation to NYC, a walkable downtown filled with shops and restaurants as well as existing infrastructure of class “A” office space has drawn baby boomers and millennials alike to experience all Morristown has to offer. In the commercial real estate community, owners, occupiers and developers have taken note and continue to acquire and improve properties in the CBD.

Earlier this year Vison Real Estate Partners acquired 1776 on the Green (67 Park Place East). Vision intends to renovate the iconic

150,000 square-foot-building that sits on the northeastern corner of the Morristown Green. Recently, The New Jersey Monthly Magazine Building (55 South Park Place) was acquired by Paragano Commercial LLC. This turn-of-the-century office building will most likely be expanded and improved into a boutique, modern office building with ground floor retail space overlooking the Morristown Green. Developers are also considering adding additional floors to two existing South Street structures, creating more rentable space. Given that the vacancy rate for class “A” & “B” office space west of I-287 is approximately 6.2%, it makes sense for developers to deliver new office space to that market.

Despite this robust market, owners and developers in Morristown are facing a real challenge as they consider the feasibility of modifying existing buildings to accommodate the needs of modern office tenants. These challenges include the costs, timeframes and related complications associated with obtaining municipal approvals. Municipal officials are trying to balance progress with historic preservation of the town that housed Washington’s headquarters during the Revolutionary War. This has slowed the redevelopment process, especially for owners with significant buildings near the historic green. However, it can be done, an emblematic example of which is the new Fox Rothschild office building developed by Hampshire Companies. The 45,000 square-foot Class A office building on a triangular block between Market and Bank Streets, was recently completed and has been leased in its entirety by the prominent law firm who sought both a location and a building to attract and retain legal talent.

Looking forward, there are other sites in Morristown that can be sold and redeveloped. One of the most notable is the historic United States Post Office, located right off the Morristown Green. Developers both in and out of New Jersey are taking a special interest in the renewal of one New Jersey’s most historic and prominent towns.

� Gubernatorial elections always create both risks and opportunities for the commercial office markets. As the election approaches, each of the candidates will start to articulate their plans on to address New Jersey’s crucial economic challenges, including pension and debt obligations, which have the potential to further stifle the state’s growth opportunities in the future.

� We will be paying attention to the future of the popular EB-5 Immigrant Investor Program and the 1031 tax provision. Both have been utilized by numerous developers and owners to facilitate the growth of their businesses.

Trends to Watch

4.1%New Jersey's unemployment rate

(national rate 4.3%)

Market Facts

Overall vacancy rate

Partnership. Performance. avisonyoung.com

Second Quarter 2017 / OfficeNew Jersey

Market Data PointsNew Jersey

New Jersey Office Total Net Absorption and Vacancy Rate

New Jersey Office Direct Asking Rent

Northern New Jersey Central New Jersey

Select Sale Transactions

Market at a Glance

Tenant Building Submarket/Market Type Size (SF)

AT&T 30 KNIGHTSBRIDGE ROAD, PISCATAWAYROUTE 287/CENTRAL NEW JERSEY

RENEWAL 252,000

GUARDIAN LIFE INSURANCE COMPANY OF AMERICA

101 CRAWFORDS CORNER, HOLMDELMONMOUTH/CENTRAL NEW JERSEY

DIRECT 90,000

TORRE LAZUR MCCANN 3 SYLVAN WAY, PARSIPPANYPARSIPPANY/NORTHERN NEW JERSEY

DIRECT 65,000

Building Submarket/Market Sale Price Price PSF Size (SF)

500 PLAZA DRIVE, SECAUCUS MEADOWLANDS/NORTHERN NEW JERSEY $115,000,000 $258.00 445,060

CROSSINGS AT JEFFERSON PARK, WHIPPANY(3 BUILDINGS)

PARSIPPANY/NORTHERN NEW JERSEY $69,000,000 $131.00 525,000

103 CARNEGIE CENTER, PRINCETON PRINCETON SOUTH/CENTRAL NEW JERSEY $15,800,000 $164.00 96,000

Select Lease Transactions

Indicator 2Q17 2Q16

Vacancy 15.9% 16.2%

Rent $27.33 $26.99

Indicator 2Q17 2Q16

Vacancy 16.7% 17.1%

Rent $27.89 $27.64

Indicator 2Q17 2Q16

Vacancy 14.8% 14.9%

Rent $26.71 $26.16

$15.00

$17.00

$19.00

$21.00

$23.00

$25.00

$27.00

$29.00

NewJerseyOfficeDirectAskingRent

NewJersey ClassA ClassB

14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0% 17.5%

-1,500,000

-1,000,000

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

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bsorption

NewJerseyOfficeTotalNetAbsorption andVacancyRate

TotalNetAbsorption VacancyRate

Market By The Numbers

Second Quarter 2017 / OfficeNew Jersey

Partnership. Performance. avisonyoung.com

Numbers as of 7/3/17

SubmarketInventory

(SF)

Direct Vacant

(SF)

Sublet Vacant

(SF)

2nd Quarter 2017 Overall

Vacancy Rate

2nd Quarter 2017 Net

Absorption(SF)

Year-To-Date

Absorption

Current Under

Construction (SF)

Overall Average

Asking Rent Class A

Overall Average

Asking Rent Class B

Bergen Central 6,677,527 868,164 175,244 15.6% 65,664 56,165 - $29.95 $23.89

Bergen East 8,566,428 940,774 57,782 11.7% 81,588 47,535 360,000 $28.39 $23.16

Bergen North 9,191,972 1,220,909 120,796 14.6% (189,919) (236,869) - $29.08 $23.62

Hudson Waterfront 21,908,555 1,732,210 577,235 10.5% 145,681 298,956 - $44.02 $32.10

Meadowlands 6,638,989 1,010,580 168,186 17.8% (21,951) (8,831) - $27.15 $23.26

Morristown Region 12,327,540 3,104,044 77,585 25.8% (27,549) 58,556 - $29.85 $24.28

Newark/Urban Essex 17,330,292 3,153,826 115,326 18.9% (136,089) (133,096) 467,532 $30.14 $24.71

Northwest Frontier 411,444 38,824 1,695 9.8% 18,949 67,520 - - $23.81

Parsippany 17,003,025 3,528,861 291,610 22.5% (109,511) (235,265) 200,000 $30.00 $23.59

Short Hills/Millburn 2,932,446 131,789 27,688 5.4% (16,253) (42,020) - $39.27 $31.65

Suburban Essex/Rt. 280 10,741,362 1,146,299 15,166 10.8% 47,054 216,670 - $26.75 $23.22

Wayne/Paterson 5,744,394 710,113 15,333 12.6% 18,949 166,635 - $23.84 $19.83

Western Morris 2,985,850 1,186,914 - 39.8% 13,014 19,935 - $24.55 $20.57

Northern New Jersey Total 122,459,824 18,773,307 1,643,646 16.7% (110,373) 275,891 1,027,532 $29.61 $23.44

Brunswick/South Edison 12,636,651 1,949,445 220,842 17.2% (276,476) (626,826) - $27.88 $23.58

Hunterdon Cluster 4,510,993 1,258,024 - 27.9% 25,035 25,261 - $22.17 $21.21

Monmouth 11,168,291 1,219,967 62,170 11.5% 13,188 68,340 45,200 $31.24 $25.17

North Edison/Woodbridge 5,990,529 943,930 68,639 16.9% (19,696) 5,282 - $33.37 $21.74

Princeton North 2,141,942 294,626 44,009 15.8% 40,273 29,052 - $24.55 $22.00

Princeton South 17,744,889 2,117,139 386,588 14.1% (281,929) (77,807) 132,000 $30.20 $23.30

Route 22 West 5,158,862 303,031 356,123 12.8% 162,798 104,763 68,000 $24.73 $19.69

Route 287 9,635,631 1,642,399 104,912 18.1% (215,373) (185,331) - $20.91 $17.38

Route 78 East 15,722,565 1,352,069 156,965 9.6% 23,211 176,253 - $29.14 $24.45

Union 4,214,833 643,835 21,345 15.8% 24,610 101,896 - $23.63 $23.85

Central New Jersey Total 88,925,186 11,724,465 1,421,593 14.8% (504,359) (379,117) 245,200 $28.11 $23.06

New Jersey Overall Total 211,409,010 30,497,772 3,065,239 15.9% (614,732) (103,226) 1,272,732 $28.90 $23.26

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As of May 2017, New Jersey’s unemployment rate fell to 4.1 percent, compared to 5.1 percent at the same time last year. This rate is at its lowest level since June 2001, below the national unemployment rate of 4.4 percent.

While the private sector contracted during May by 14,000 jobs, there has been steady job growth over the past 12 months, with private employers adding 48,100 jobs since May 2016. All nine major private industry sectors posted job gains over the past 12 months. On the other hand, the public sector has decreased by 5,000 jobs since May 2016.

On the political front, Republican Kim Guadagno and Democrat Phil Murphy won their primaries and will face off in this November’s gubernatorial election. Among the challenges that the next Governor will face is trying to grow the New Jersey economy. This could prove to be difficult as the state is saddled with over $153.5 billion of debt, which is now the third largest in the country.

The New Jersey industrial market had positive net absorption for yet another quarter while overall leasing activity dropped to a little over 5.6 million square feet. This represented a significant decline from the 10.9 million square feet of leasing activity year-over-year. Leasing activity in the Northern New Jersey Market also fell in the first quarter of 2017 to 2.4 million square feet as compared to 3.2 million square feet in the second quarter of 2016. The Central New Jersey market experienced 3.1 million square feet of leasing activity, down from 7.7 million square feet during the same period last year. This normalization in leasing activity seems to be a result of a contraction in the market, resulting in less available space.

One of the largest deals this quarter was Amazon’s lease of 2 Brick Yard Road in Cranberry. Amazon leased building two of the three-building Cranbury Logistics Center. The logistic center has been developed by Clarion Partners, the New York-based Real Estate developer. Amazon has continued utilizing the strategy of leasing large warehouse space near the I-95 corridor, enabling themselves to serve the greater Tristate area.

Economy IndustrialLeasing

Second Quarter 2017 / Industrial

New Jersey

4.1%New Jersey's unemployment rate

(national rate 4.3%)

9.2M12-month absorption (SF)

4.8%

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Second Quarter 2017 / IndustrialNew Jersey

Vacancy and RentsThe overall industrial vacancy rate dropped to 4.8 percent from 5.3 percent during the second quarter of 2017. The direct triple net asking rents rose to an all-time high of $7.26 per square foot in the second quarter of 2017. Rents have risen more than 26 percent over the past five years. It remains to be seen if rents can continue to rise in the future, and if so, at what rates.

Investment SalesAccording to Real Capital Analytics, $341.4 million worth of industrial sale transactions were completed during the second quarter of 2017. This represented a decline from the 567.4 million in sale transactions year-over-year.

One of largest sale transactions of the quarter was The Hampshire Companies sale of a 6-building, $146.8 million industrial portfolio to AEW Capital Management L.P., a Boston-based investment group. The portfolio has a 96 percent occupancy rate and includes properties in Caldwell, Carteret, South Hackensack, Lodi and Saddle Brook.

Market Facts

Overall vacancy rate

� The effect of Amazon’s recent purchase of Whole Foods on the fresh food delivery industry is certainly worth paying close attention to. Amazon will try to crack the “last mile” conundrum that is essential for profitable fresh food delivery. New Jersey currently has the 8th most Whole Foods stores in the country with 17 locations. For a number of years Amazon has revolutionized the way people shop, and it remains to be seen if they can do the same with the fresh food industry.

� There has been a continued appetite for the purchase of both vacant and performing assets pushing the price of industrial properties to historically high levels. The market has also seen a steady flow of developers looking to purchase land with the intent to construct both speculative and build-to- suit properties.

Trends to Watch

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Second Quarter 2017 / IndustrialNew Jersey

Market Data PointsNew Jersey

New Jersey Industrial Vacancy Rate vs. Direct Asking Rent

New Jersey Office Direct Asking Rent

Northern New Jersey Central New Jersey

Select Sale Transactions

Market at a Glance

Tenant Building Submarket/Market Type Size (SF)

AMAZON 2 BRICK YARD RD, CRANBURY EXIT 8A/CENTRAL NEW JERSEY NEW 992,043

AUTO-MAN 400 DOCKS CORNER ROAD, MONROE EXIT 8A/CENTRAL NEW JERSEY NEW 365,400

SUBZERO 275 KUSER ROAD, HAMILTON MERCER/CENTRAL NEW JERSEY NEW 339,500

Building Submarket/Market Sale Price Price PSF Size (SF)

HAMPSHIRE PORTFOLIO(7 BUILDINGS)

MULTIPLE MARKETS $146,800,000 $121.41 1,218,164

700 COMMERCIAL AVE, CARLSTADT(2 BUIDINGS)

MEADOWLANDS/NORTHERN NEW JERSEY $21,300,000 $202,00 105,400

400 SOUTH 2ND STREET, ELIZABETH UNION/CENTRAL NEW JERSEY $13,200,000 $115.00 115,078

Select Lease Transactions

Indicator 2Q17 2Q16

Vacancy 4.8% 5.3%

Rent $7.26 $6.58

Indicator 2Q17 2Q16

Vacancy 5.3% 5.7%

Rent $7.82 $6.94

Indicator 2Q17 2Q16

Vacancy 4.3% 4.8%

Rent $6.61 $6.15

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

$5.00

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$6.00

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Average NNNAskingRent VacancyRate-1,000,000

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Market By The Numbers

Second Quarter 2017 / IndustrialNew Jersey

Partnership. Performance. avisonyoung.com

Numbers as of 7/3/17

SubmarketInventory

(SF)

Direct Vacant

(SF)

Sublet Vacant

(SF)

2nd Quarter 2017 Overall

Vacancy Rate

2nd Quarter 2017 Net

Absorption(SF)

Year-To-Date

Absorption

Current Under

Construction (SF)

Direct Asking

Rent

Bergen Central 24,900,322 1,513,478 2,000 6.1% (51,368) 271,518 - $8.92

Bergen North 23,006,651 1,243,419 177,948 6.2% 117,695 182,768 271,195 $9.00

Eastern Morris 20,366,969 1,369,527 252,454 8.0% 26,902 68,003 - $6.73

Hudson Waterfront 33,100,783 1,988,253 263,072 6.8% 21,560 (449,740) - $6.80

Meadowlands 91,001,368 3,202,529 135,540 3.7% (63,502) 344,201 1,502,351 $8.81

Morris West/I-80 15,703,145 1,011,029 18,164 6.6% 17,589 24,774 30,000 $6.77

Morristown Area 4,965,174 672,683 10,000 13.7% (73,300) 3,029 - $9.57

Newark 35,807,422 1,633,548 60,210 4.7% (199,779) (661,658) 706,000 $6.95

Northwest Frontier 2,618,364 122,171 - 4.7% (2,273) 6,041 - $7.36

Rt. 46/23/3 50,231,866 2,087,117 74,792 4.3% (271,339) (367,635) - $7.65

West Essex 24,074,458 1,442,560 106,452 6.4% (251,883) (99,079) 29,000 $7.02

Northern New Jersey Total 325,776,522 16,286,314 1,100,632 5.3% (729,698) (677,778) 2,538,546 $7.82

Exit 8A 64,485,289 2,152,938 85,762 3.5% (273,826) 1,072,532 2,076,275 $6.07

Exit 9-Piscataway 48,992,590 2,176,773 62,314 4.6% 397,475 713,511 564,700 $6.52

Exit 10-Cateret Avenel 76,416,941 1,881,788 175,687 2.7% 514,301 885,988 2,347,023 $7.41

Mercer 32,357,033 2,593,101 2,153 8.0% (343,104) 15,348 1,612,137 $5.14

Monmouth 19,373,567 1,016,407 28,175 5.4% (225,467) (535,372) 20,987 $8.69

Somerset 31,768,996 1,189,854 61,118 3.9% 254,933 755,953 748,560 $7.25

Union 59,260,316 2,881,810 109,657 5.0% 504,964 582,305 1,425,294 $6.90

Central New Jersey Total 332,594,732 13,892,671 524,866 4.3% 829,276 3,490,265 8,794,976 $6.61

New Jersey Overall Total 658,371,254 30,178,985 1,625,498 4.8% 99,578 2,812,487 11,333,522 $7.26

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© 2017 Avison Young. All rights reserved.

E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.

Jeffrey L. HellerPrincipal and Managing Director, New Jersey 973.753.1100jeff.heller@avisonyoung.com

Jason Bloom Research Manager 973.753.1081jason.bloom@avisonyoung.com

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Market ReportSecond Quarter 2017New Jersey